A change of tack

Today sees the release of the European Commission’s annual review of its members’ economic and debt-cutting policies. It’s a big moment.

This is the point at which we get confirmation that France, Spain, Slovenia and others will be given more time to get their budget deficits down to target. We already know that France will get an extra two years, while Spain will get another two extra years (to 2016) to bring back its deficit below 3 percent. That comes on top of the 1-year leeway given last year.

This is the austerity versus growth debate in action. But let’s be clear, whatever the rhetoric, this is anything but an end to austerity. What it is, is an invitation to cut more slowly for longer. And in return, there will be extra pressure to press ahead with structural reforms to make economies more competitive and help create jobs. Spain already has, France has barely started and it is there that a lot of the concern rests. If Europe’s second largest economy fails to revitalize itself it will be a big blow to the EU project and further erode France’s political ability to drive it in tandem with Germany.

The European Commission is likely to ask France to tackle its labour laws which makes it difficult to fire someone on a permanent contract, making employers reluctant to hire. It also has the highest minimum wage in Europe and will be asked to open up closed professions like taxi drivers, the legal professions and the health sector, and allow competition into railways and electricity. Paris is under internal pressure too. Yesterday its central bank governor, Christian Noyer, said it must cut public spending after Standard & Poor’s declared that a further rating downgrade was probable absent further deficit-cutting measures – this at a time when the economy has just slid back into recession. Noyer also said it was inevitable that the French would have to work longer. That adds up to something of a perfect storm for a Socialist government already facing stiff opposition from its allies.

Outside the euro zone, Brussels could announce that Hungary can exit its excessive deficit procedure, which would be another political coup for Prime Minister Viktor Orban and his unorthodox policy approach. Budapest is working on a standback on the apparent success of Orbanomics, defying all expectations. The man he appointed to run the central bank will hold a news conference on his plans to boost growth. Yesterday, he and his colleagues cut interest rates for the 10th consecutive month and flagged more to come.

The OECD’s semi-annual review of the state of the world’s major economies, released a little earlier, will show how far the euro zone has to go before it is growing solidly again. That will again beg the question what more should the European Central Bank do, particularly since inflation falling way below its target gives it clear room to act. Market attention is focused on cutting the deposit rate – the rate banks get for parking funds at the ECB – into negative territory to try and get them to lend. But will that do much?

And here comes another report. ECB Vice President Vitor Constancio will present the central bank’s latest Financial Stability Review this afternoon. It will give an update on the health of the euro zone’s banking sector and will probably be accompanied a plea for EU leaders to press on with banking union. The ECB will get an overarching regulatory role next year but plans for a common structure to wind up failing banks is foundering on German opposition.

Italy will sell up to eight billion euros of short-term treasury bills. Spanish yields rose at auction for the first time in three months in the past week and there are signs that the 10-month fall in peripheral euro zone borrowing costs could be drawing to a close. But that trend did not persist in Rome yesterday, where two-year debt costs fell to their lowest level since the launch of the euro.
German Bund futures have fallen almost half a point early on, with Tuesday’s strong U.S. data again raising the prospect that the Federal Reserve may begin scaling back its money-printing programme. European stocks are poised to head south for the same reason.

Despite months of bond market euphoria – started by the ECB’s pledge to do whatever it takes to save the euro and given a further shot in the arm by Japanese money printing – the economic numbers look grim and no more so than in Greece.

Athens has set a Wednesday deadline for binding bids to buy Greece’s natural gas state company DEPA but the privatization drive that was a key part of Greece’s debt-cutting drive is falling far short. The government appears to have changed some terms in the planned privatisation, opening the way for Russian energy giant Gazprom GAZP.MM to bid for the firm. Sounds like that could be selling off on the cheap again, which will merely leave another financial hole, which will have to be filled elsewhere. The recent sale of the government’s 33 percent stake in betting monopoly OPAP netted a figure way below the market value.
Separately, the Greek central bank will produce an updated economic outlook. Up to now, it is predicting the economy will shrink by 4.5 percent this year before recovering in 2014.